Category: 
April 1 2008In the last 2 weeks or so ALL UK banks and lending institutions that I and my fellow investors use seem to have tightened their belts and repriced their mortgage products. Fixed rates have gone up as well as variable tracker rates. Arrangement fees are also still stupidly high.
Even though UK Interest rates have recently come down or stayed the same for the last few months. These latest lending rate hikes are definitely a result of the US credit crunch and is a result of less money being available to the banks to lend out.
BMS fixed rate products have gone from 3 year 5.09% rates to 2 year 5.54% rates with heafty arrangement fees of 2.5% of the loan amount (even this poor rate has today been pulled in favour of possibly an even worse product).
Mortgage Express who do instant remortgages for investors have repriced their 2 year fixed rates at 6.09% making most deals not possible for investors who need the instant remortgage product.
As it is now harder for borrowers to get decent mortgages to buy homes, this will directly reduce the ammount of sales as people cannot buy the homes they want to at todays price. The rate hikes mean that affordability will be reduced. This may in turn bring a downturn in the market. I’m a little worried are you?
There are 9 comments
Bound to happen eventually. The US is in meltdown mode, but will recover.
A ‘little’ is a bit of an understatement mate =/ Can’t see things improving for at least another 12-18 months either. I feel sorry for the people who bought houses at inflated prices in the last two years.
There was an interesting article on BTL in the papers the other week. In fact, there’s been loads of programs on BTLs crashing, esp those oversupplied city flats.
alright LeoN,
Part of me is a little worried about future prices, but i’m also quite excited. if the prices do fall my portfolio will be worth less than currently, but i can then go on a buying spree and buy more at lower prices.
Buying spree without comfirming with me first?? I don’t think so
When there is movement in a market, you can guarantee that someone somewhere is making money. Even if a housing crash were to happen, there’s millions to be made. The key is knowing how to plug into that.
one of the ways is on purchasing proeprty below market value, and renting back to the very people who have a mortgage coming to the end of its term, and need to remortgage, to find they cant.
they dont want to move, but they cant afford to stay. So the sale and rent back is one way forward, and you can maintain the rents too.
You are going to need an exemplary credit rating to get the rates, so a bit of work checking your credit rating wouldnt go amiss. On my equifax report, it emails me every time someone does something to it (checks it, adds or removes it). This can also have combat ID fraud, as you double check when something happens to it.
A lot of the BTLers are pulling out of the city centres (bought 4 myself this week from distressed landlords, whose properties were still rented out with good rental income).
A lot more BTL’s want to pull out, but they can’t as no-one is buying, and even if they were, they couldnt get the mortgage on it due to rates being pulled, or simply the mortgage no longer “stacks up” with the new rates and 125% rental coverage. So they’re kindof stuck right now.
The good news for property investors, is that with no-one buying, people have to live somewhere, and so they will move to rented accomodation.
now we have seen an increase in the number of tenants, but due to oversupply (city centre in particular), that hasn’t translated into higher rental prices yet, although it will in some locations. But that will come in the next few months or so.
Remember, we’re right at the start of this thing, so some of the market forces havent had time to hit yet.
Sorry for rattling on, but hope that helps !!
You can see one of my latest contributions to the Residential Landlords Magazine this month (page 34 i think!)
cheers all
Yes, you should be worried.
Relative to earnings, house prices mean revert to a multiple of about 4. In normal cycles, they oscillate between 3 times and 5 times earnings (and the reason why house prices themselves have gone up so much since 1945 has simply been earnings growth – coming mostly from inflation). In 2002, they were at 5 times earnings (which was why your friends said that houses were expensive then – they were), but because of an abnormal speculative, irrational and leveraged bubble – driven by equally irrational improvements in credit conditions since then, house prices are now at 7.5 times earnings. This means that to return to the normal level v. earnings they have to fall by 40%, but they are likely to go to 3 times earnings first – which would mean a fall of 60% on an earnings-adjusted level. OK, so what would this mean for house prices themselves? Well, we can expect the BoE to keep inflation at about 2% (it is their only monetary mandate, after all) and we can expect real earnings growth to be at best 1.5%, meaning that earnings may (if we are lucky) grow at about 3.5% p.a. in the years to come. Let’s now say that house prices take 5 years to reach their bottom. In earnings adjusted terms, a fall of 60% is a compound of prices falling 16.7% every year, if we reduce that fall by 3.5% earning growth we get 13.2%, or about 50% over 5 years ion nominal terms. This is more than 3 times worse than the 1989-1994 fall (of 15%). You are in it “for the long term”, so how long before house prices return to last years levels? Assume a quick move back to 4 times earnings after the first 5 years then a generous 4% p.a. earnings growth: another 10.5 years, making 15.5 years in total. That’s 2023 to get back to 2007 levels. In the meantime, you need £2m of equity in your £4m portfolio to be sure of saving yourself from negative equity.
I think the market here in the us still has some more room to drop. I am hoping that I am wrong but I don’t think the worst is quite over yet.
Im not quite sure that it will take until 2023 for things to get back to normal !
As for prices dropping 60%, I have to doubt that would happen.
Lets get this right. Properties are not stocks and shares. they are not liquid and can be sold on a whim. Any decrease in prices will have to take a while to filter through to the person on the street. That along with the fact that properties are not being built (or definitely slowed down), divorce rates are up, kids leaving home longer and an increase in immigration (even the government doesnt know byu how much), then it looks like a fairly soft landing.
We’ve seen rents rise for studios and 1 beds in the city centre, and drop for two beds due to oversupply. This will balance out.
As for BoE keeping inflation at 2%, im not quite sure where they get their inflation figures from, but its definitely not 2% !
Council tax has risen around 9% depending on where you live.
Petrol/Diesel Fuel has risen substantially.
Gas and electricity prices have risen dramatically.
Everyones off on a strike because their pensions arent enough (fuel works, rubbish collectors, teachers).
Inflation is zooming up, which in turn means that payrises will have to keep going up, which overall is good the the investor with quite a decent portfolio, as their levels of debt slowly recede due to inflation, earnings start to increase (once we get past the unemployment thats coming but on anyones radar).
2 million builders are employed in the UK. I hear that Barratt homes are stopping building, and as they dont employ their own builders to build the houses, that means more builders on the dole.
4,000 estate agents are alleged to go under this year, and dont forget all the knock in industries such as mortgage advisors (Paragon made two thirds redundant), HIPS providers are cutting prices as no one is selling, and therefore no HIPs.
The knock on effect here is huge !
The industries that dont get touched by a recession are students, nurses and other public sector style workers, and that byt the way includes DSS.
If you;re any investor right now, there is nothing like excess cash, but not just coming from your portfolio in case rents do drop, but in terms of alternative income streams.
See an increase in people starting up businesses as they take voluntary redundancy.
I’ve had 5 c.v.’s through last week from estate agent folk, we usually get 2 per month.
So things are definitely changing, hang on to the portfolio for as long as possible, and get an additional income to cover any surplus.
Its not even possible to buy Below Market Value (having bought 4 myself this month alone), but the rules are changing.
Now I know not everyone will agree with me, and thats fine of course.
As i run several business, I get to see what folk are doing first hand across the board, and its not looking pretty.
I’ve seen so many market analysts call the market and be 100% wrong. Its not chartism that will help here and average ratios of this that and the other.
Its the person on the street and what they’re doing.
I have my flame retardent underwear on just in case you all disagree !
cheers all
Sounds like UK investors are following the US investor’s lead. In the US, there is no shortage of available fund for the banks, yet the spread premium continues to rise. In the US, it is due to the banks hoarding for cash reserves, and due to the fact that we are still in an overall housing market decline. Cheers!
Jim Bisnett
Refinance Tool Box